The Man Who Saved America

It's probably unpopular to say this now, when everyone wants to string up the bankers and the people who saved their bacon. But Ben Bernanke was preparing his whole life for what happened last year, and he is the reason you still have a bank account, not to mention a functioning society

Ben Bernanke was not the savior of 2006. Or of 2007. Or even of 2008. The years before the crisis, those were not good ones for Ph.D. economics geniuses like Ben Bernanke. Those years belonged to, I hate to say this, bloggers.

I'm not going to do this here, but it's probably worth investigating why almost every economist in government, academia, and business missed the signs that the entire Internet was trying to alert them to. In 2006 and 2007, for example, so ubiquitous were Web sites proclaiming a coming housing disaster that they took on a name of their own: bubble blogs. Every city had a bubble blog—Seattle, Phoenix, Bakersfield, Miami. There were bubble-blog aggregator sites. There were sites with names like Housing Doom and the Mortgage Lender Implode-O-Meter, sites explaining in uncanny and precise detail exactly the path by which the crisis would spread throughout the rest of the financial system—from the midsize subprime lenders to the investment banks, then to the larger commercial banks, and then to financial institutions around the world.

On the other hand, Ben Bernanke—my choice for Hero of 2009, by God—said in 2007 that the "impact on the broader economy&of the problems in the subprime market seem likely to be contained."

But if you needed a Housing Doom to help you see the crisis coming, you needed an econometric-modeling, SAT-acing expert on board when it actually hit. And of all the experts like that to have at the helm when this crisis was finally uncorked, fate couldn't have handed us anyone better than Benjamin Shalom Bernanke, who saved us all from the second Great Depression.

How perfect was Bernanke? Consider this history. For three decades following World War II, economists had been trying to figure out why exactly the Great Depression became a depression instead of just a bad recession. But it wasn't until the early 1980s that a whiz kid at Stanford University published a paper called "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression" and arguably put the final puzzle piece in place. That whiz kid's name? Alan Greenspan!

Just kidding. It was Ben Bernanke.

Bernanke's discovery, which rocked the economic world, can be explained like this. Banks are important. Disproportionately important to the overall health of the economy. A bank's main job is to take money that's just sitting there—savings—and lend it out to businesses. When banks fail, they help trigger a kind of death spiral. The amount of overall lending in the economy shrinks, meaning it's harder for businesses that need money to get it. Also, healthy banks get stingier, again preventing companies from getting the money they need. This overall drop in lending eventually starves businesses of cash, which causes them to fail, which causes banks to hoard money even more. See? Death spiral.

The crucial footnote here is that when Ben Bernanke wrote that paper, posing a theoretical solution to an academic puzzle, he was also writing the instruction manual he'd be using twenty-five years later.

Last year, after the collapse of Lehman Brothers and the near collapse of AIG, Bernanke took a series of radical actions, far beyond the purview of anything a Fed chairman had ever done in history, all designed to avoid the mistake that he himself discovered we'd made in the 1930s.

First of all, he created over a trillion new dollars. Created it out of thin air, a very risky thing to have done. A trillion dollars—that's the entire discretionary budget for the United States.

Next, he used that money in ways Fed money had never been used before. He lent it to the same investment banks that had caused the crisis. He used it to buy the same, now devalued, financial products that had been at the center of the crisis: mortgage-backed securities. He wove that new Fed money into every corner of the financial world, such that almost every house bought or credit card purchase made or student loan taken out during 2009 was in some way financed by Fed money.

Of course, a lot of people hated this. Large swaths of the Internet went apoplectic that he was turning us into Zimbabwe, setting the stage for hyperinflation, destroying the dollar. But most economists, including many of Bernanke's former critics like Nouriel Roubini and Paul Krugman, now say it's hard to imagine how the economy would have survived if he hadn't done what he did.

So thanks, Ben. We'll forgive the fact that you didn't see what was coming—and be relieved that by looking back at what happened, you saved us from what might have been.

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